Fitch Ratings has affirmed the ratings of Great-West Lifeco (TSE:GWO)
including the holding company's Issuer Default Rating (IDR) at 'A+' and
all outstanding senior debt and hybrid issues, as well as the Insurer
Financial Strength (IFS) ratings of all operating subsidiaries at 'AA'.
The Rating Outlook is Stable.
The ratings rationale is based upon the company's consistently strong
and stable core insurance earnings; strong competitive position in the
Canadian market; conservative investment profile; and overall actuarial
liability profile that is not heavily exposed to the equity markets.
Offsetting these positives are the company's relatively high use of
financial leverage and the ongoing underperformance of Putnam
Investments (Putnam), which has strained overall earnings levels and has
caused fixed-charge coverage to remain at depressed levels for some time.
Fitch views positively GWO's solid core insurance earnings performance
as it drives and supports the company's financial flexibility and
consolidated risk-based capital position. Fitch believes this
performance is reflective of the company's conservative risk appetite
which has resulted in lower-risk product design, pricing discipline,
strict asset-liability matching, and management of key earnings drivers
such as expenses and persistency. Additionally Fitch views the Canadian
life insurance market as inherently less risky than the U.S. life market
due to greater pricing rationality and less aggressive product
guarantees. Operating earnings in the first nine months of 2012 were
CAD1.5 billion, up 4.6% from the same period in 2011. Operating return
on equity on a trailing four quarter basis was 16.1%, above the
company's long-term target of 15%.
Fitch believes GWO's investment performance is a reflection of its
conservative investment policies and underwriting standards as well as
its asset/liability, liquidity and investment skills. By policy, the
company does not invest in below-investment-grade (BIG) credits, and
therefore reported exposure in this category consists of 'fallen
angels,' including privately placed issues with strong covenant
protection. BIGs totaled CAD1.4 billion at Sept. 30, 2012, or 1.5% of
bond investments. At CAD2.6 billion in total investment provisions,
Fitch believes that GWO is well-provisioned for future credit loss and
that future impairments in excess of actuarial reserve provisions are
likely to remain within manageable levels and ratings expectations.
Fitch believes GWO's actuarial liabilities are relatively insensitive to
equity markets, due to the avoidance of riskier enhancements to
individual segregated funds. The company's primary exposure to equity
markets is through Putnam.
At Sept. 30, 2012 GWO's financial leverage was 21% and GAAP
earnings-based interest and preferred dividend coverage was
approximately 6.5 times (x).
Key rating triggers for GWO's ratings that could lead to a downgrade
--A sustained drop in the company's risk-adjusted capital position with
no plans or ability to rectify. This would include the U.S. risk-based
capital ratio falling below 400% and MCCSR ratios falling below 200%;
--Increase in financial leverage to over 25% or an increase in total
leverage to over 35%;
--Sizable goodwill impairment on Canada Life or London Life acquisitions;
--Acquisitions outside GWO's historical risk preferences or expertise,
or any other material changes in risk appetite for the company;
--Reduction in Power Financial Corporation's ownership stake in GWO.
Fitch considers an upgrade of GWO's ratings in the near to intermediate
Fitch has affirmed the following ratings with a Stable Outlook:
Great-West Lifeco, Inc.
--Long-term IDR at 'A+';
--6.14% senior debentures due March 21, 2018 at 'A';
--4.65% senior debentures due Aug. 13, 2020 at 'A';
--6.74% senior debentures due Nov. 24, 2031 at 'A';
--6.67% senior debentures due March 21, 2033 at 'A';
--5.998% senior debentures due Nov. 16, 2039 at 'A';
--Series F, 5.9% non-cumulative first preferred shares at 'BBB+';
--Series G, 5.2% non-cumulative first preferred shares at 'BBB+';
--Series H, 4.85% non-cumulative first preferred shares at 'BBB+';
--Series I, 4.5% non-cumulative first preferred shares at 'BBB+';
--Series J, 6% non-cumulative first preferred shares at 'BBB+';
--Series L, 5.65% non-cumulative first preferred shares at 'BBB+';
--Series M, 5.80% non-cumulative first preferred shares at 'BBB+';
--Series N, 3.65% non-cumulative first preferred shares 'BBB+';
--Series P, 5.4% non-cumulative first preferred shares rated 'BBB+';
--Series Q, 5.0% non-cumulative first preferred shares rated 'BBB+';
--Series R, 4.8% non-cumulative first preferred shares rated 'BBB+'.
GWL&A Financial Corp.
--Long-term IDR at 'A+'.
Canada Life Financial Corporation
Great-West Life Assurance Company
--IFS at 'AA';
--Long-term IDR at 'AA-'.
Canada Life Assurance Company
--Long-term IDR at 'AA-';
--6.4% subordinated debentures due Dec. 11, 2028 at 'A+'.
Great-West Life and Annuity Insurance Company
--Short-term IDR at 'F1+';
--Commercial paper at 'F1+'.
London Life Insurance Company;
Great-West Life and Annuity Insurance Company of New York
--IFS at 'AA'.
Great-West Lifeco Finance (Delaware) LP
--5.691% subordinated debentures due 2067 at 'BBB+';
--7.127% subordinated debentures due 2068 at 'BBB+'.
Great-West Life & Annuity Insurance Capital, LP
--6.625% deferrable debentures due Nov. 15, 2034 at 'BBB+'.
Great-West Life & Annuity Insurance Capital, LP II
--7.153% subordinated debentures due 2046 at 'BBB+'.
Canada Life Capital Trust
--Series B, 7.529% senior debentures due June 30, 2052 at 'A'.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Insurance Rating Methodology ??? Amended
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